Earnings Call: Q2 2018

Aug 2, 2018

Good day, everyone, and welcome to the PBF Energy Second Quarter 2018 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following management's prepared remarks. Please note, today's call may be It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin. Thank you, Erica. Good morning, and welcome to today's call. With me today are Tom Nimbley, our CEO Matt Lucey, our President Eric Young, our CFO and several other members of our management team. A copy of today's earnings release, including supplemental financial and operating information, including throughput guidance, is available on our website. Before getting started, I'd like to direct your attention to the Safe Harbor statement contained in today's press release. In summary, it outlines that statements contained in the press release and on this call, which express the company's or management's expectations or predictions of the future are forward looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we described in our filings with the SEC. Consistent with our prior quarters, we will discuss our quarterly results excluding a non cash lower of cost or market or LCM after tax gain of approximately $116,300,000 As noted in our press release, we will be using certain non GAAP measures while describing PBF's operating performance and financial results. For reconciliations of non GAAP measures to the appropriate GAAP figure, please refer to the supplemental tables provided in today's press release. I'll now turn the call over to Tom Nimbley. Thank you, Colin. Good morning, everyone, and thank you for joining our call today. For the Q2, we reported adjusted EBITDA of approximately $365,000,000 which was in line with our expectations and a good result. We ran well when the market was there and that is the key to this business. Looking ahead, we see a number of items that are lining up favorably for the refining sector in general and for PBF specifically. Market fundamentals are favorable as we progress through the summer driving season. Product inventories, especially distillates are trending down with inventory days to cover for distillates near 5 year lows despite high refinery utilization. Demand for clean products remains strong across the board and this continues to be supported by a strong export market. On the crude side, we continue to see opportunities to source the most advantaged barrels for our system and we've seen many differentials move favorably. WCS takeaway capacity constraints should continue to support wider differentials, which benefits many of our assets, especially the East Coast. While RINs prices were under control in the Q2, we are still hopeful for more permanent action on RINs, particularly since the acting EPA administrator referenced the White House RFS negotiations at a hearing this week. EPA and EIA data show ethanol blending end use remains robust, even slightly ahead of this point in time last year, despite RINs prices well below the 2017 average. These facts prove that you can control RIN costs without adversely impacting biofuel use. Looking ahead, we believe our high complexity refining system is well prepared for the upcoming marine diesel fuel standard ship with IMO 2020. As we have said in the past, PBF has more coking capacity on a percentage of throughput basis than all but one independent refiner. That being said, PBF does have the opportunity to optimize its system even more. We have received Board approval as well as all required permits from the State of Delaware for a 3rd party processor to build and own a new hydrogen plant that will sell incremental hydrogen to Delaware City. The new supply of hydrogen, which should come online in Q4 of 2019, will further increase Del City's clean product yield and allow the refinery to process an even harsher crude slate. Our strategy in this environment, as always, is to put our assets in a position to succeed and capitalize on strong market fundamentals. We do this by running our assets safely and reliably and by making selective organic investments in high return projects that incrementally improve our crude sourcing optionality and our yield of high value products. By executing these strategies, our assets will be profitable and our employees and shareholders will benefit. I'll now turn the call over to Matt to run through our operational highlights. Thanks. As Tom mentioned a moment ago, the story of the second quarter was availability of our assets. We accomplished a significant amount of turnaround work in the Q1 and this set up our system to run well during the Q2. Market did present some challenges as cracks narrowed late in the quarter, but favorable feedstock differentials Total throughput for our refining system during the Q2 was approximately 867,000 barrels per day, which was in line with guidance. Chalmette continues to run reasonably well and we continue to see significant latent potential in this asset. The tank project completed by PBF Logistics continued to deliver on expectations as we exported on average 48,000 barrels per day of cleaned products in the Q2. The restarted reformer and associated equipment is now performing as expected and we should see full benefits going forward. We continue to uncover and evaluate other opportunities within the plant to increase our clean product yield and enhance margins. In Toledo, our Q1 turnaround, while it was completed on budget, it did extend into the 1st couple of weeks of April, which impacted our results for the quarter. Since then, the refinery operated well and was able to take advantage of the very favorable crack environment. The East Coast ran well in the Q2 and continues to run well. The Paulsboro refinery set record levels of production for asphalt, averaging 20,000 barrels per day in the quarter. Our results show the advantage of having these high complexity assets and Delaware, in particular, has been and will be a beneficiary of wider crude differentials, especially WCS. Lastly, Torrance. It continues to perform well. The liability is excellent and operating expenses, which were $6.80 for the refinery, were in line with our expectation. Our high yield of clean products coupled with favorable crude differentials drove the strong results. For the remainder of the year, system availability should be high. Torrance, Chalmette and Toledo do not have any planned downtime for the remainder of the year. Our turnaround activity will be focused on the East Coast in the fall. Paulsboro has scheduled work on its coker and smaller crude unit, which is set to begin in mid September with work complete by mid October. Delaware City has turnaround work scheduled for its Reformer and Aeromax units set for November. With that, I'll turn it over to Eric, who will go through financials. Thank you, Matt. As a reminder, our comments on Q2 results will exclude the aforementioned non cash LCM item. For the Q2, PBF reported income from operations of approximately $264,300,000 and adjusted fully converted net income of $160,200,000 or $1.38 per share on a fully exchanged, fully diluted basis. Our EBITDA comparable to consensus estimates was approximately $365,000,000 which includes approximately $8,000,000 of non cash stock based compensation expense. For the quarter, G and A expenses were $58,700,000 depreciation and amortization expense was $92,300,000 and interest expense was approximately 43,400,000 dollars PBF's effective tax rate for the quarter was approximately 25%. For modeling purposes going forward, please continue to use an effective rate of 27%. Our rent expense for the 2nd quarter totaled $39,000,000 While still a burden at the current rate, we could see full year rent expense in the $150,000,000 to $175,000,000 range as compared to our 2017 expense of approximately $300,000,000 Consolidated CapEx for the quarter was approximately $214,000,000 dollars which includes $213,000,000 for both refining and corporate CapEx and an incremental $1,000,000 incurred by PBF Logistics. These figures exclude the $58,000,000 paid by PBF Logistics for the Knoxville Terminals acquisition. With respect to our balance sheet, we ended the quarter with liquidity of approximately $1,800,000,000 including $478,000,000 in cash and our consolidated net debt to cap was 36%. Lastly, we're pleased to announce that our Board has approved a quarterly dividend of $0.30 per share. Also of note, today, PBF Logistics announced its 15th consecutive quarterly distribution increase and provided additional details on its growth plans. I encourage you to listen to that earnings call later this morning. Operator, we've completed our opening remarks and we'd be pleased to take any questions. Thank you. In a moment, we will open the call to questions. The company requests that all callers limit each turn to one question and one follow-up. We'll go first to Roger Read from Wells Fargo. Please go ahead, sir. Yes, good morning. Good morning. I guess, can we talk a little bit, you mentioned it in the preview here, the economics of crude by rail to the East Coast, particularly WCS barrels. And then could you give us an idea, is there anything else, thinking the extreme differentials we've seen in West Texas and maybe as that gets worse as the year rolls on, what the opportunities may be there as well? Sure, Roger. Obviously, you know what the market is right now for WCS versus TI and then when you layer on the Brent TI spread, you've got a pretty wide differential that we are going to be move have been moving a significant amount of volume somewhere between 60,000, 70,000 barrels a day and we'll continue to source that and if we can run more we will. Most of that is going to the East Coast, but some of that's going to Chalmette and some of it's going to Torrance as well. We see that situation continuing for 18 months to 24 months, perhaps longer and it's just going to be totally a function of much as it is in the Permian, the ability to clear the barrel by some means other than rare. And right now that looks like that isn't going to happen some period of time. So as I said, we believe this puts us in a favorable position to source a difficult crude to run, but a profitable crude for us. On the Permian side and the distressed side there, we do have some exposure to that, but today as we do run some basically Permian based crews in Toledo. It's not a huge volume, but we'll try to see if we can source higher volumes of that. But obviously, anybody who everybody is trying to source more volumes and those pipelines are pretty full. Good story for us though. Yes, definitely. I guess the follow-up question, you've now put several quarters in a row here of good OpEx performance at Torrance, which is good. But with that now essentially corrected, focus here on Shawmut, margins there have definitely been a little bit weak. Touched on some of the things here, the restart of the reformer and kind of the commentary to do more. Can you give us an idea at Shawmut what we should be looking for over the next, let's say, 12 to 24 months of what can help margins there? Let me give you a little more detail. Yes. It's a great question. And to be perfectly honest, when we took over Torrance, we put all of our optimization focus, I shouldn't say all, but a high percentage of our optimization focus, self help if you want to use the jargon into the opportunities that we saw in Torrance and they were manifest. And we captured a lot of those things, whether they be going into new markets like Vegas or starting to produce some asphalt in Torrance, literally a laundry list of things that we started pursuing and pursuing in vigor and we captured a fair amount of that in torrents, but there's still some to be had. In the last 3 months, we have shifted that optimization focus full time into Chalmette because candidly there is a lot of opportunity there. As we have talked before, that was a broken marriage, that joint venture. There was not a lot of creativity, ingenuity, money put into the plant. And we have now developed a significant list of opportunities whether they we're into the Matt mentioned that we've made 20,000 barrels a day sold 20,000 barrels a day of asphalt at Paulsboro at good numbers. Well, we're a pretty big player in the asphalt business, which allows us to increase throughput at Chalmette and with the Gulf Coast cracks right now, that's very economic. We're looking to we're clearly focusing on different crude substitutions. They had a very narrow envelope. And then the other area that is Chalmette has a lower percentage of high value products than I would like or we would like. And we see opportunities to increase distillate yield, particularly by modifying some of the operations inside the fence line. And we're doing test programs right now to verify that upside. But suffice it to say, we think there's fertile ground in Chalmette. And Roger, just on the just from the reformer, to right size that, depending on octane values, you should see incremental EBITDA from those process units $40,000,000 to $70,000,000 a year range. Okay, great. Thank We'll go next to Neil Mehta from Goldman Sachs. Please go ahead. Good morning. This is Carly Davenport on for Neil. Thanks for taking the questions. My first one is just on cash flow from during the quarter. Was there any working capital impact in that number we should be aware of? We had about $65,000,000 of positive working capital hit the balance sheet. Okay, great. Thank you. And then my follow-up would just be, on California, we've seen some weakness in West Coast refining margins during the Q3. So just wanted to get your thoughts on that market going forward. And then along with that, how you view the earnings power of Torrance in that context? I think clearly, California is a market that when everything runs well, you can get into a reasonably balanced position on inventory supply demand. Right now, that's pretty much the case. Everything is running well, including Torrance. Those things will change. You get into the heat of the summer, you're going to wind up seeing some operation cuts just because of frankly temperature, humidity, cooling cooling temperatures. Right now, I personally believe that Torrance is going to be our best refinery in the PBS system and at the end of the day would put it up against any other refinery on the West Coast. That assumes that we continue to make progress in how we run it and keep our operating results under control. So from an earnings power standpoint, we are very happy we purchased that facility. Great. Thank you. Thank you. And we will go take a follow-up from Roger Read from Wells Fargo. Please go ahead. I didn't think I'd be on quite that quickly. Could we go back and talk about the hydrogen plant, sort of how does that compare to the economics you have today for hydrogen at Del City? And then how should we think about that impacting you really, I guess, 2020 onwards? Yes. The project will come in, as I said, 4th quarter. It is a 3rd party lease arrangement. So we'll be spending a little bit of capital to hook up the hydrogen plant to the various units inside the refinery and then it'll be a 3rd party provider of the hydrogen who is actually going to build it and operate it. And we'll give them a lease payment, which is attractive and gives us a fixed cost of hydrogen, which is attractive. And clearly what this will do is Delaware is a powerful machine, lots of coking, hydrocracking, lots of hydro treating and insufficient hydrogen when you have a market that is rewarding you for running harsh, higher sulfur, lower gravity crudes. And that market exists today and we expect it would exist in the absence of Marpr. However, with Marpr coming, it just gets exacerbated. So we'll wind up with a little bit more hydrocracker feed. We'll make a little bit more diesel, but the big play is it would allow us to actually increase the amount of heavier higher sulfur crudes, which we expect to be obviously threatened or negatively impacted from a price standpoint in a post Marpol world. Okay, thanks. And then from I guess one quick follow-up on that. Where today do you source hydrogen from somewhere else or is it simply not available on the East Coast? Actually, there are no 3rd really there's no East Coast refinery that has a third party hydrogen plant. So the way we source hydrogen, for example, in Carlsboro, we actually have a small hydrogen plant that is there that we run periodically, but most of it comes from hydrogen produced off the reformer. Own and we run-in addition to the reformer hydrogen, but it's that in total is not sufficient for what we can really use. So this will be the 1st third party hydrogen plant built on the East Coast. That's more than norm by the way in the rest of the country. Right. And is there can you frame any kind of margin uplift, EBITDA impact from the additional availability at this point? Roger, I would say, what we expect in 2020 with IMO, it increases, as Tom mentioned. But in today's environment, you're, call it, dollars 40,000,000 and probably north of $75,000,000 in a post-twenty 20 world. Okay. And then last question for you. RFS, RINs, issues, Obviously, I've been following the same things you mentioned, the favorable comments from the new administrator. But anything else you can add to that? I would think election year, little expectation between now November, but after that maybe something can happen. Yes. I do think the administration has been working to find a solution. The other side of the refiners are not an easy group to manage, but the simplest way to look at it in today's market is there have been some waivers granted by the EPA, but yet lending has not declined. In fact, it's increased. So the whole argument that the biofuel side needs high RIN prices has been proven to be bunk. And so we'll continue to work with the White House and with EPA. And there was a compromise that we think would have worked. Maybe we'll go back to that or maybe there'll be a new one. But I do think there is a joint agreement that it needs to be addressed and addressed in a comprehensive fashion. Okay, great. Thank you. Thank you. And we'll go next to Paul Sankey from Mizuho. Please go ahead. Good morning, all. Welcome back. Very impressive selection of questions from Roger there. Can we just follow-up, I guess, seeing his answer has some good ones. But I was wondering how you see IMO impacting you. It was a little bit more specific what you said previously. And I guess what I was wondering is how soon you think this impact is going to come through given presumably everyone's going to have to be ready for what seems to be a 3,000,000 barrel a day change in the market. I don't know if that's kind of the number you guys are working with. But the question is, do you think the impacts are coming through already? Or do we wait till 2019? Or will it be late 2019? Thanks. Thank you, Paul. It's good to hear your voice again. Same for you, Tom, the Dolphin Tones of New Jersey. There you go. Look, I think we've been pretty clear on this. We are well positioned for IMO. I personally believe IMO is probably already started to show up in some manner. To a limited extent, I don't think it's going to be a light switch that goes off on December 31. I think you're going to see you got to get the new oil to whatever port it's got to be in so that when it starts getting loaded on a ship to be compliant fuel, I think anybody in this supply chain, whether it be the shippers, the refiners, the producers, all need to be looking at IMO because it is a rather significant change and deciding what things they want to do and boards in every directors in every boardroom should be addressing this question. An example is if you have a stranded here's our view, the 3,000,000 barrel number you talked about, yes, that's pretty much the consensus. You're basically going to wind up disappearing 3,000,000 barrels a day of high sulfur bunker fuel and then replacing it with 0.5, which is effectively a sweet gas oil or diesel look alike. So, it would be a big increase in distillate demand and sweet gas oil demand. That can be made, we think, without distillate margins simply because, well, there's a 3,000,000 barrel increase in demand and 100,000,000 barrel global demand position, when you do it on a distillate basis only, it's pretty significant. I personally think the bigger factor is going to be sulfur is the enemy and the sweet sour spreads and light heavy spreads will widen out and particularly for refiners who don't have an ability to clear that bottom stream today. So somebody who's running or Arab crudes or any sour crude that does not have hydro treating capability on a bottom stream or coking capability has got to find a way to clear that barrel. And I think there's going to be a lot of bartering going on as people look for opportunities to maybe look to people like PBF who have coke and capacity to see whether or not that can happen. But as I said, I think this not you cannot wait till December 31. That will be way too late and I suspect we're going to start seeing momentum pull on this thing right around mid year. How are you going to move the excess heavy fuel oil around? I mean, presumably, it's not like you're generating a lot of it, but you could use more. It's a great question. Logistics is a big play here. We talk about, okay, people with hydrocrackers can make a lot of distillate their advantage, and that's true. And certainly, we're advantaged because we can run every barrel we produce, and coca. But there is a big logistics play. And one of the reasons we bought the we announced we bought the Axione terminal candidly is that has 4,000,000 barrels of tankage and 3 of its heated tankage and we're going to look to see how we can hook up Paulsboro and Delaware City together, but just as importantly, figure out how to import coca feed into our plants. And to do that, you need heated barges, you need to figure out how to have hot pipes. So there's some opportunities here, but there's some work that has to be done there. But logistics is a big play. Great. And then if I could just ask the final one. I've got to work out how to frame this, it's the M and A question. We know that your stock is to sell every day in the market and we know that you're always looking. But is there anything that you can add on M and A as of today? You mentioned a relatively minor acquisition that you just made. Particularly wondering if there's impact from, in your view, and I'm sure there is, of a couple of the mergers, notably the MPC Endeavor merger on the market? Thanks. Yes, I think there's no doubt that the MPC Endeavor merger was, I wouldn't say a game changer, but it just raised the bar significantly in terms of consolidation. We are continuing, as you say, and you know the company well. If somebody wanted to come along and write a big check, that rewarded our shareholders, this management would fully support that. At the same time, absent that, we have to grow the company. But candidly, I don't know if it's because of MARPOL, but MARPOL is probably a contributing event as opposed to 3 or 4 years ago, the bid ask on these facilities is pretty wide and we want to be very careful. Marpol at a big Marpol at a big number and then Marpol is only going to be a couple of year things. So we don't really have anything right now, but we continue to look. Thank you. And at this time, we have no further questions. So I'd like to turn it back over to Tom Lindley for closing remarks. Thank you everybody for attending today's call. And those of you who have attended Holly's call, we'll look forward to seeing you next time. Thank you. We'd like to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time.